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Fixed Income Trading: New venues

A simple question came up recently in a conversation – how many new Fixed Income trading venues are there?  I could not think of anywhere th...

Friday, 11 December 2015

Third Avenue, the next crisis in the Bond market and Liquidation Risk...

This post will quote extensively from an excellent Bloomberg article entitled "Third Avenue Blocks Redemptions From Credit Fund Amid Losses"
The main thrust of the article is that "$788 million mutual fund is blocking clients from pulling their money so its holdings can be liquidated in an orderly fashion...David Barse, Third Avenue’s chief executive officer, said blocking redemptions was necessary to avoid fire sales."This sounds a lot like the situation this blog proposed in the post The next crisis in the Bond market... Which was summarised as "By packaging up illiquid assets into a vehicle that produces a continuously priced asset there is an illusion of liquidity.  But the illiquidity is still there, just with one degree of indirection."

The Bloomberg article goes on "In September, the U.S. Securities and Exchange Commission proposed new rules that would require funds to maintain a minimum cushion of cash or cash-like investments that can be sold within three days. Another proposal would allow funds to offer less favorable share pricing to investors who pull their money during periods of elevated withdrawals.

The SEC has also ramped up its exams of bond mutual funds, grilling managers about how easily they think they could sell holdings if trading dried up and probing whether disclosures appropriately describe how a jump in interest rates might affect debt investments."
 
Which all sounds rather like Liquidation Risk which proposed "As such a unitised fund may be priced at 101.15/101.05 but this does not reflect what happens when there is a market disruption that causes a rush for the exit as unit holders try and offload their units. How can an investor really manage a portfolio of assets where for each asset a NAV is calculated but the NAV is based upon "good times" pricing models? What happens when the good times stop? My modest proposal is that every unitised fund should not just be priced at bid and ask but also a liquidation price calculated and published.  So 101.15/101.05 and then perhaps 85 as a liquidation price.  The benefit of this approach is that unit holders can than see a simple measure of liquidation risk, the difference between the bid price and the liquidation price expressed as a percentage of the bid price. The methodology for calculation of the liquidation price should be subjected to peer review, perhaps under the auspices of Global Investment Performance Standards."

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